If you are in a relationship, have a family or own a property, the chances are you have already made a Will. As any accountant would tell you, it’s the prudent thing to do and it makes absolute financial sense; after all, wouldn’t you want the peace of mind of knowing that your assets will go those you love most after your death? Now, you would assume that those people who were savvy enough to make a personal Will would also do the same for their businesses. Yet, it appears that isn’t necessarily the case. According to a recent study by Legal & General more than half of Britain’s small business owners have left no instructions in their Will or made any special arrangements regarding shares.
What information was revealed by the Legal & General study?
The Legal & General’s ‘State of the Nation’s SMEs’ report surveyed over 800 small and medium-sized businesses (SMEs). Its findings revealed that as well as the 51 per cent of SMEs failing to leave instructions relating to shares on the death of one of the directors: only 41 per cent of small businesses had a shareholders’ agreement and, shockingly, only 33 per cent had bothered to look in their arrangements at all since the business was originally launched.
The survey also found that only roughly 25 per cent of shareholders would buy the shares left following the death of a fellow shareholder, with over half stating they would have to rely on their personal wealth to do this. 21 per cent of SME owners said they thought their beneficiaries would inherit and become active in the business, while 16 per cent said they would consider selling their shares to a third party.
Addressing the issues raised by the survey, Richard Kateley, Head of Intermediary Development at Legal & General, said:
“For those established SMEs that have a presence in their chosen market, the death of a business owner can be hugely significant should there be no plan in place or an arrangement regarding company shares.”
“This could lead not only to shares being tied up in probate, paralysing an SME’s operations if this was a majority share, but could see the beneficiaries of these shares becoming involved in the business, whether or not they have any aptitude. Or, in the worst-case scenario, selling those shares to a competitor meaning the surviving owners losing control of their business.”
Is there anything SMEs owners can do to avoid these problems?
SME owners can purchase share protection insurance, which could allow a business to buy back the shares through a lump-sum pay-out, avoiding the impact of shares being tied up in probate. However, the survey found that this wasn’t an option for many smaller companies. The survey found that only 36 per cent of SMEs with a worth of over £5 million did not have share protection insurance in place.
Fewer than 20 per cent of the businesses surveyed had even considered how a life policy could help them, and that is something Richard Kateley believes is vitally important:
“Many business owners see their business as a way to fund their retirement. The death of an owner could not only put their family’s financial wellbeing at risk, but equally their fellow owners due to the impact on the business. A simple Shareholder Protection agreement can help to protect the owners from a situation like this, as well as help the business stay in the right hands and flourish.
He urged accountants, financial advisers and solicitors with clients owning established SMEs to speak about the risks of leaving shares unprotected:
“Whether they need to consider revising their current arrangements, or implement a protection plan to help them buy back shares, you’re well positioned to provide advice should the worst happen.”
If you are worried about the long-term future of your SME, or are concerned by any of the issues raised in this article, speak to Steven Glicher accountants. For further information on business planning call Steven Glicher accountants 0161 485 8007 or email firstname.lastname@example.org.